Introduction to Liability for Damage of Liquidation Obligors

According to the laws of the Peoples Republic of China, a company shall be liquidated upon its dissolution. Should the person (obligor) with the obligation of the liquidation of the company fail to fulfill such obligation in accordance with the law, the obligor shall bear the corresponding legal liabilities. This article will sort out the issues concerning corporate liquidation obligors’ liability from a practical perspective for the reference of companies in the field.

1.The determination of liquidation obligors

Liquidation obligors refer to subjects bearing the obligation of initiating the liquidation procedure after the dissolution of a legal person (e.g. company). Paragraph 2, Article 70 of the Civil Code specifies that “The members of a legal person’s executive organ or decision-making organ, such as directors or council members, are liquidation obligors, except as otherwise provided for by any law or administrative regulation.” According to Article 183 of the Company Law and Article 18 of the Judicial Interpretation (II) of the Company Law, the liquidation obligors of a limited liability company are its shareholders, while the liquidation obligors of a joint stock company are its directors or controlling shareholders.

2. How to determine the liquidation obligors’ liability for damages?

There are mainly two common situations where the compensation liability of liquidation obligors arises:

2.1 Liability for Neglecting to Fulfill Liquidation Obligations

“Neglect to fulfill obligations” refers to the shareholder’s breach of the obligation to fulfill during the company’s liquidation process, causing certain losses to the company or creditors. According to Article 18 of the Judicial Interpretation (II) of the Company Law, where shareholders of a limited liability company or directors and controlling shareholders of a joint stock company neglect to fulfill their obligations, resulting in the loss of the company’s primary assets, account books, important documents, etc., and rendering the liquidation impossible. The creditors assert that such obligors of the limited liability company or directors and controlling shareholders of the joint stock company shall be jointly and severally liable for the debts of the company, the relevant People’s Court shall subsequently support such assertion.

2.2 Liability for Malicious Disposal or Misappropriation of the Company’s Property

This situation refers to shareholders of a limited liability company, directors and controlling shareholders of a joint stock company, or actual controllers of the company maliciously disposing of the company’s property through transfer, donation, sale at a low price, or paying debts at a low price after the company is dissolved, causing losses to the creditors.

According to Article 19 of the Judicial Interpretation (II) of the Company Law, where the liquidation obligors maliciously dispose of the company’s property after the dissolution of the company, causing losses to the creditors of the company, or where the liquidation obligors misleads the company registration authority in the handling of the cancellation registration of the legal person without carrying out the liquidation according to the law, and the creditors assert that such liquidation obligors shall bear corresponding liability for the debts of the company, the People’s Court shall also support such assertion.

3. Conclusion

In summary, during the process of the liquidation of a company, the liquidator shall avoid intentional delay in, or refusal of, liquidation obligations, as well as avoiding the malicious disposal of the company’s property so as to avoid the risk of liability for damages.